Exam 13: Empirical Evidence on Security Returns

If a professionally-managed portfolio consistently outperforms the market proxy on a risk-adjusted basis and the market is efficient, it should be concluded that

Which of the following is a (are) result(s) of the Fama and French (2002) study of the equity premium puzzle?I) Average realized returns during 1950-1999 exceeded the internal rate of return (IRR) for corporate investments.II) The statistical precision of average historical returns is far higher than the precision of estimates from the dividend-discount model (DDM).III) The reward-to-variability ratio (Sharpe) derived from the DDM is far more stable than that derived from realized returns.IV) There is no difference between DDM estimates and actual returns with regard to IRR, statistical precision, or the Sharpe measure.

Fama and French (1992) found that

In the 1972 empirical study by Black, Jensen, and Scholes, they found that the estimated slope of the security market line was _______ what the CAPM would predict.

One way that Black, Jensen and Scholes overcame the problem of measurement error was to

The CAPM is not testable unless

The Fama and French three-factor model uses ___, ___, and ___ as factors.

Tests of multifactor models indicate

An extension of the Fama-French three-factor model includes a fourth factor to measure

The seller of an asset with limited buyers may suffer from reduced prices. This could be a result of market _____________.

In the results of the earliest estimations of the security market line by Lintner (1965) and by Miller and Scholes (1972), it was found that the average difference between a stock's return and the risk-free rate was ________ to its nonsystematic risk.

Petkova and Zhang (2005) examine the relationship between beta and the market risk premium and find

Which of the following statements is true about models that attempt to measure the empirical performance of the CAPM?

In developing their test of a multifactor model, Chen, Roll, and Ross hypothesized that __________ might be a proxy for systematic factors.

In the empirical study of a multifactor model by Chen, Roll, and Ross, a factor that did not appear to have significant explanatory power in explaining security returns was

Which of the following must be done to test the multifactor CAPM or the APT?I) Specify the risk factorsII) Identify portfolios that hedge the risk factorsIII) Test the explanatory power of hedge portfoliosIV) Test the risk premiums of hedge portfolios

Equity premium puzzle studies may be subject to survivorship bias because

Liquidity embodies several characteristics, such as

Consider the regression equation: r_i − r_f = g₀ + g₁b_i + g₂s²(e_i) + e_it Where: R_i − r_t = the average difference between the monthly return on stock i and the monthly risk-free rate B_i = the beta of stock i S²(e_i) = a measure of the nonsystematic variance of the stock i If you estimated this regression equation and the CAPM was valid, you would expect the estimated coefficient, g₂, to be

If a market proxy portfolio consistently beats all professionally-managed portfolios on a risk-adjusted basis, it may be concluded that